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Possession of Note is Required

livinglies.wordpress.com | June 28, 2016

By Neil Garfield

"The Golden Rule of Mortgage Foreclosure: the Uniform Commercial Code forbids foreclosure of the mortgage unless the creditor possesses the properly-negotiated original promissory note. If this can’t be done the foreclosure must
stop."
--Douglas Whaley, Professor Emeritus, The Ohio State University Moritz College of Law.

"By saying yes, the homeowner admits that the paper is original which it is not, he admits that it is his signature, which it is not, and he admits that the possession of the original note is unquestionable which is completely wrong because the actual original was "lost" many years earlier."
--Neil F Garfield

THE FOLLOWING ARTICLE IS NOT A LEGAL OPINION UPON WHICH YOU CAN RELY IN ANY INDIVIDUAL CASE. HIRE A LAWYER.

The problem with the great tidal wave of foreclosures has been that everyone (lawyers, judges and homeowners) have made great leaps of faith in accepting nonexistent facts. And the other problem is that all foreclosures are governed by the UCC which has been adopted in all 50 states as State Law. It is the source of all governing law as to the ability to negotiate the note, enforce the note and to enforce the foreclosure provisions contained in the mortgage.

All law schools provide two semesters of instruction on the Uniform Commercial Code. Most law students, including those who become judges, can barely stay awake during the lectures and barely comprehend the content of the instructional material. I was the exception. I received the American Jurisprudence Book Award for the best performance in that class. Others in my class paid close attention but the majority struggled to stay awake. And nearly everyone forgot practically everything they learned about the UCC immediately after taking the Bar Exam that contained few questions about the UCC. So for most people in American jurisprudence, the UCC is regarded as a quaint irrelevancy.

Those who created the current infrastructure of what is erroneously referred to as securitization understood that nearly all lawyers --- on or off the bench --- retained practically nothing about the Uniform Commercial Code. They correctly predicted that the Judge would accept whatever the lawyer for the Bank said was in the UCC. The result was a startling array of decisions twisting and undulating in confusion about exactly who should be paid by the "borrower", who could modify the obligation, who could enforce the note and who could foreclose.

I found study of the UCC to be enjoyable because it follows a certain logic in the real world. In an increasingly complex world it would slow down commerce to a snail's pace if the note were not negotiable, transferable and deliverable. Otherwise one would need to go back to the maker of the note and get payment, most of the time before it was due. That would stop the new transaction in its tracks. Or one would need to get the signature of the maker (borrower) on anew instrument in order to use the note as the basis for a new transaction of any kind. Something was needed to create "cash equivalency" of paper with or without the knowledge or consent of the maker. Both the maker and the possessor of the note would need certain protections so that no inequities would arise, hopefully.

So the best minds in the judicial world came together and created a uniform code that everyone everywhere in the country would follow. It was originally a "National Code." Like all new endeavors there were defects in the structure of laws in the first national code which was based upon centuries of common law decisions from trial and appellate courts. So the next generation of brilliant legal minds came together to fix the defects and create certainty in the marketplace for negotiable instruments and ancillary instruments like mortgages.

As a general rule one must physically possess the note in order to negotiate it or enforce it. Possession was determined by thousands of judges and lawyers to be essential to enforcement and thus also negotiation of any note; this was so because if a party claimed rights to enforce a note but admitted that the note did not exist, was in the possession of someone else or even lost, the maker might be liable multiple times. So POSSESSION became the gold standard. As a brief example of how this applies to the many issues we have discussed on this blog, let's begin with the "closing."

The "borrower" is required to sign the note before the loan is funded. Hence the loan contract is not commenced or consummated until funding. BUT the signing of the note created a negotiable instrument. After signing the note, the customary practice is for the closing agent to take delivery of the note. The closing agent thus becomes the first possessor, but without any right to enforce the note.

Back when I stared law practice a representative of the lender was frequently present at closing. Once all the papers had been properly signed and money was received by the closing agent to fund the loan, the closing agent would physically deliver the note to the representative of the lender or transmit this valuable document ("cash equivalent") to the lender or its authorized representative. If the lender was the funding source, the loan contract was complete and the the lender was the possessor of the note with direct rights to enforce --- i.e., the lender was named on the note as payee just as one would write out a check.

If the lender sold the loan into the secondary market, the lender would receive a sum of money the amount of which was determined by agreement between the buyer and the lender as seller. The buyer would receive physical possession of the note with an "indorsement" frequently spelled as "endorsement." The endorsement would generally be made payable to the name of the buyer but it could be endorsed in blank, which would make the loan negotiable or enforceable by anyone who came into possession --- even a thief, who could sue but not win once the facts of the theft came out.

The above description is what most people have in mind when they think about loans today. But their thoughts are antiquated.

Today, the "loan closing" starts in the usual way --- the "borrower" is required to sign the note thus creating a negotiable instrument before any funding takes place. The party named as lender is never present and thus cannot take possession of the note. The closing agent is the first possessor with no rights to enforce. But theoretically the closing agent, if he or she was dishonest, could bring suit to enforce the note. Like the thief, the closing agent can sue but he cannot win. But I digress.

What happens next depends upon whether the lender is an actual lender who might still be sending a representative to the "closing," or is an originator who merely sells the loan product to the borrower. 96% of all "loan closings" over the past 15 years were "originator" loans.

In the case of an originator the physical note, best case scenario, is sent to the party who was instructing the funding source, as a conduit. The originator is not generally allowed to touch, much less possess the note nor does it have any right of enforcement --- because the originator has already signed an "Assignment and Assumption" Agreement before the borrower even applied for a loan. Hence the originator lacks both possession and any authority to negotiate the note.

If the originator is still in business (check the Implodometer.com), at some time in the future a representative of the originator is called upon to execute an indorsement of the note. Lacking both physical possession of the note and the right to enforce it such an endorsement is void. Someone else possesses it and as it turns out, a party other than the possessor supposedly has (or claims) the right to enforce the note.

The party with possession could theoretically acquire the right to enforce from the party who claims to have the right to enforce --- and in today's market that is exactly what happens. If the originator is not in business the signature nevertheless appears like magic as an officer of an institution that does not exist --- but lacking the date on which it was executed. Or, as is usually the case we learned from the robo-signing, robo-witness, robo-officer scandals, we see some signature of a person who either didn't exist or was not employed by any of the parties in the false paper trail. Neither the lawyer for the homeowner nor the homeowner is able to prove this because the information is in the hands of third parties who are not even parties to the foreclosure litigation.

The problem with that scenario is that the party who claims the right to enforce it does not have those rights, does not have possession, does not have any receipt or proof that it paid for the note, and is essentially a stranger to the entire transaction --- but now nonetheless accepted in court by itself or through an agent or power of attorney as the party in possession with rights to enforce. Such representations are untrue and a fraud upon the borrower, the court and anyone else having an interest in the actual events that transpired at the "loan closing."

Further eviscerating the position of the eventual party who has conducted foreclosure proceedings is the documented fact (see Study by Catherine Ann Porter) that most and perhaps nearly all of the original notes were immediately and intentionally destroyed. Fabrications of the note were created each time the loan was sold. Such sales were often virtually simultaneous so that the party claiming the right to enforce the note and the right to foreclose received multiple payments on the same loan while at the same time retaining the "servicing rights" so that they could foreclose and report to the unhappy buyers that their investment was worthless.

Hapless homeowners with clueless lawyers were asked at trial if the document before them was the original. The homeowner had no idea that the signature he or she was looking at was forged by high tech mechanical means which today actually employs a ball point pen and created variations in the signature as to pressure, lines and swirls. By saying yes, the homeowner admits that the paper is original which it is not, he admits that it is his signature, which it is not, and he admits that the possession of the original note is unquestionable which is completely wrong because the actual original was "lost" many years earlier.

 

 

 

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